Ethics Case 20-5 Softening the blow
Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled to begin Monday.
For three months, the economy had been in a down cycle and the transportation industry was particularly hard hit. As a result, Joy expected AMT's financial results would not be pleasant news to shareholders. However, what Joy saw in the preliminary statements made her sigh aloud. Results were much worse than she feared.
"Larry (the company president) already is in the doghouse with shareholders," Joy thought to herself. "When they see these numbers, they'll hang him out to dry."
"I wonder if he's considered some strategic accounting changes," she thought, after reflecting on the situation. "The bad news could be softened quite a bit by changing inventory methods from LIFO to FIFO or reconsidering some of the estimates used in other areas."
Required:
1. How would the actions contemplated contribute toward "softening" the bad news?
2. Do you perceive an ethical dilemma? What would be the likely impact of following up on Joy's thoughts? Who would benefit? Who would be injured?
Click here for the solution: Ethics Case 20-5 Softening the blow
Showing posts with label CPA. Show all posts
Showing posts with label CPA. Show all posts
Friday, September 25, 2015
Friday, September 11, 2015
Allison, CPA has completed the audit of the financial statements of Optima Corporation as of and for the year ended December 31, 2009
Auditing P 3-27 Allison, CPA has completed the audit of the financial
statements of Optima Corporation as of and for the year ended December
31, 2009. Allison also audited and reported on the Optima financial
statements for the prior year. Allison drafted the following report for
2009.
We have audited the balance sheet and statements of income and retained earnings of Optima Corporation as of December 31, 2009. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of misstatement.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly the financial position of Optima Corporation as of December 31, 2009, and the results of its operations for the year then ended in conformity with generally accepted auditing standards, applied on a basis consistent with those of the preceding year.
Allison, CPA
(signed)
Other Information
-Optima is presenting comparative financial statements.
-Optima does not wish to present a statement of cash flows for either year.
-During 2009, Optima changed its method of accounting for long-term construction contracts and properly reflected the effect of the change in the current year's financial statements and restated the prior year's statements. Allison is satisfied with Optima's justification for making the change. The change is discussed in footnote 12.
- Allison was unable to perform normal accounts receivable confirmation procedures, but alternative procedures were used to satisfy Allison as to the existence of the receivables.
-Optima Corporation is the defendant in a litigation, the outcome of which is highly uncertain. If the case is settled in favor of the plaintiff, Optima will be required to pay a substantial amount of cash, which might require the sale of certain fixed assets. The litigation and the possible effects have been properly disclosed in footnote 11.
-Optima issued debentures on January 31, 2008, in the amount of $10 million. The funds obtained from the issuance were used to finance the expansion of plant facilities. The debenture agreement restricts the payment of future cash dividends to earnings after December 31, 2013. Optima declined to disclose this essential data in the footnotes to the financial statements.
Required:
a. Identify and explain any items included in "Other Information" that need not be part of the auditor's report.
b. Explain the deficiencies in Allison's report as drafted.
Click here for the solution: Allison, CPA has completed the audit of the financial statements of Optima Corporation as of and for the year ended December 31, 2009
We have audited the balance sheet and statements of income and retained earnings of Optima Corporation as of December 31, 2009. We conducted our audit in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of misstatement.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly the financial position of Optima Corporation as of December 31, 2009, and the results of its operations for the year then ended in conformity with generally accepted auditing standards, applied on a basis consistent with those of the preceding year.
Allison, CPA
(signed)
Other Information
-Optima is presenting comparative financial statements.
-Optima does not wish to present a statement of cash flows for either year.
-During 2009, Optima changed its method of accounting for long-term construction contracts and properly reflected the effect of the change in the current year's financial statements and restated the prior year's statements. Allison is satisfied with Optima's justification for making the change. The change is discussed in footnote 12.
- Allison was unable to perform normal accounts receivable confirmation procedures, but alternative procedures were used to satisfy Allison as to the existence of the receivables.
-Optima Corporation is the defendant in a litigation, the outcome of which is highly uncertain. If the case is settled in favor of the plaintiff, Optima will be required to pay a substantial amount of cash, which might require the sale of certain fixed assets. The litigation and the possible effects have been properly disclosed in footnote 11.
-Optima issued debentures on January 31, 2008, in the amount of $10 million. The funds obtained from the issuance were used to finance the expansion of plant facilities. The debenture agreement restricts the payment of future cash dividends to earnings after December 31, 2013. Optima declined to disclose this essential data in the footnotes to the financial statements.
Required:
a. Identify and explain any items included in "Other Information" that need not be part of the auditor's report.
b. Explain the deficiencies in Allison's report as drafted.
Click here for the solution: Allison, CPA has completed the audit of the financial statements of Optima Corporation as of and for the year ended December 31, 2009
The CPA firm of Bigelow, Barton, and Brown was expanding rapidly
Auditing P 5-19
The CPA firm of Bigelow, Barton, and Brown was expanding rapidly. Consequently it hired several junior accountants, including a man named Small. The partners of the firm eventually became dissatisfied with Small's production and warned him they would be forced to discharge him unless his output increased significantly.
At that time, Small was engaged in audits of several clients. He decided that to avoid being fired, he would reduce or omit some to the standard auditing procedures listed in audit programs prepared by the partners. One of the CPA firm's clients, Newell Corporation, was in serious financial difficulty and had adjusted several of the accounts being audited by Small to appear financially sound. Small prepared fictitious audit documentation in his home at night to support purported completion of auditing procedures assigned to him, although he in fact did not examine the adjusting entries. The CPA firm rendered an unqualified opinion on Newell's financial statements, which were grossly misstated. Several creditors, relying on the audited financial statements, subsequently extended large sums of money to Newell Corporation.
Will the CPA firm be liable to the creditors who extended the money because of their reliance on the erroneous financial statements if Newell Corporation should fail to pay them? Explain.
Click here for the solution: The CPA firm of Bigelow, Barton, and Brown was expanding rapidly
The CPA firm of Bigelow, Barton, and Brown was expanding rapidly. Consequently it hired several junior accountants, including a man named Small. The partners of the firm eventually became dissatisfied with Small's production and warned him they would be forced to discharge him unless his output increased significantly.
At that time, Small was engaged in audits of several clients. He decided that to avoid being fired, he would reduce or omit some to the standard auditing procedures listed in audit programs prepared by the partners. One of the CPA firm's clients, Newell Corporation, was in serious financial difficulty and had adjusted several of the accounts being audited by Small to appear financially sound. Small prepared fictitious audit documentation in his home at night to support purported completion of auditing procedures assigned to him, although he in fact did not examine the adjusting entries. The CPA firm rendered an unqualified opinion on Newell's financial statements, which were grossly misstated. Several creditors, relying on the audited financial statements, subsequently extended large sums of money to Newell Corporation.
Will the CPA firm be liable to the creditors who extended the money because of their reliance on the erroneous financial statements if Newell Corporation should fail to pay them? Explain.
Click here for the solution: The CPA firm of Bigelow, Barton, and Brown was expanding rapidly
Thursday, September 10, 2015
Sarah Robertson, CPA had been the auditor of Majestic Co. for several years
Auditing P 5-27 Sarah Robertson, CPA had been the auditor of Majestic Co. for several years. As she and her staff prepared for the audit for the year ended December 31, 2008, Herb Majestic told her that he needed a large bank loan to "tide him over" until sales picked up as expected late 2009. In the course of the audit, Robertson discovered that the financial situation at Majestic was worse than Majestic had revealed and that the company was technically bankrupt. She discussed the situation with Majestic, who pointed out that the bank loan will "be his solution"-he was sure he will get it as long as the financial statements don't look too bad. Robertson stated that she believed the statements will have to include a going concern explanatory paragraph, Majestic said that this wasn't needed because the bank loan was so certain and that inclusion of the going concern paragraph will certainly cause the management of the bank to change its mind about the loan. Robertson finally acquiesced and the audited statements were issued without a going concern paragraph. The company received the loan, but things did not improve as Majestic thought they would and the company filed for bankruptcy in August 2009. The bank sued Sarah Robertson for fraud. Required: Indicate whether or not you think the bank will succeed. Support your answer.
Click here for the solution: Sarah Robertson, CPA had been the auditor of Majestic Co. for several years
Click here for the solution: Sarah Robertson, CPA had been the auditor of Majestic Co. for several years
Tuesday, September 8, 2015
Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing services
MULTIPLE CHOICE
1. Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing services to the public and other public accountants.
2. In some situations, the interpretations of the Rules of Conduct permit former partners to have relationships with a client of the firm without affecting the firm’s independence. Which of the following situations would not cause a loss of independence?
3. Anna Greer, a CPA in public practice, contacts Blake Sawyers, an employee of Jackson & Jackson, LLP, and makes him an offer of employment without first notifying Jackson & Jackson, LLP. According to the AICPA’s Code of Professional Conduct, Anna’s behavior:
4. When the question arises whether a CPA firm may do both bookkeeping and auditing services for the same public company client, the Interpretations of the AICPA’s Code of Professional Conduct:
5. A member in public practice may perform for a contingent fee any professional services for a client for whom the member or member’s firm performs:
6. “Independence” in auditing means:
7. Interpretations of the rules regarding independence allow an auditor to serve as:
8. Which of the following statements is true? The CPA firm will lose its independence if:
9. Which of the following statements is not true with respect to audit committees?
10. According to the Principles section of the Code of Professional Conduct, all members:
Click here for the solution: Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing services
1. Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing services to the public and other public accountants.
2. In some situations, the interpretations of the Rules of Conduct permit former partners to have relationships with a client of the firm without affecting the firm’s independence. Which of the following situations would not cause a loss of independence?
3. Anna Greer, a CPA in public practice, contacts Blake Sawyers, an employee of Jackson & Jackson, LLP, and makes him an offer of employment without first notifying Jackson & Jackson, LLP. According to the AICPA’s Code of Professional Conduct, Anna’s behavior:
4. When the question arises whether a CPA firm may do both bookkeeping and auditing services for the same public company client, the Interpretations of the AICPA’s Code of Professional Conduct:
5. A member in public practice may perform for a contingent fee any professional services for a client for whom the member or member’s firm performs:
6. “Independence” in auditing means:
7. Interpretations of the rules regarding independence allow an auditor to serve as:
8. Which of the following statements is true? The CPA firm will lose its independence if:
9. Which of the following statements is not true with respect to audit committees?
10. According to the Principles section of the Code of Professional Conduct, all members:
Click here for the solution: Elise, CPA, owns a public accounting firm and wishes to establish a separate partnership to offer data processing services
Monday, August 31, 2015
For the year ended 2010, Jocelyn Morris, CPA, has been engaged to audit Rogers, Inc., which is a continuing client
Problem 15-40 For the year ended 2010, Jocelyn Morris, CPA, has been engaged to audit Rogers, Inc., which is a continuing client. Jocelyn has assessed the control risk for the company at the maximum for all financial statement assertions involving investments. Consequently, the ICFR audit report will indicate material weaknesses and rather than relying on ICFR during the financial statement audit, all audit evidence will come from substantive procedures. Jocelyn determines that Rogers is unable to exercise significant influence over any investee and there are no related parties.
Morris receives an investment analysis from Rogers’s management revealing the following:
• There is a notation indicating that all securities either are in the treasurer’s safe or held by an independent bank custodian.
• Investments are classified as current or non-current.
• The beginning and ending balances are shown at cost and market.
• Unamortized premiums or discounts are associated with bonds.
• The face amount of bonds or number of shares of stock are given for the beginning and ending of the year.
• Accrued investment income for each investment at the beginning and ending of the year is presented.
• Investment income earned and collected is presented.
• Valuation allowances at the beginning and ending of the year are shown.
• Any sales or additions to portfolios for the year include date, number of shares, face amount of bonds, proceeds, cost, and realized gain/loss.
Required: Explain the audit objective for each of the listed management financial statement assertions relative to investments.
Assertion Audit Objective
1. Existence
2. Completeness
3. Rights
4. Valuation/allocation
Presentation and Disclosure
Click here for the solution: For the year ended 2010, Jocelyn Morris, CPA, has been engaged to audit Rogers, Inc., which is a continuing client
Morris receives an investment analysis from Rogers’s management revealing the following:
• There is a notation indicating that all securities either are in the treasurer’s safe or held by an independent bank custodian.
• Investments are classified as current or non-current.
• The beginning and ending balances are shown at cost and market.
• Unamortized premiums or discounts are associated with bonds.
• The face amount of bonds or number of shares of stock are given for the beginning and ending of the year.
• Accrued investment income for each investment at the beginning and ending of the year is presented.
• Investment income earned and collected is presented.
• Valuation allowances at the beginning and ending of the year are shown.
• Any sales or additions to portfolios for the year include date, number of shares, face amount of bonds, proceeds, cost, and realized gain/loss.
Required: Explain the audit objective for each of the listed management financial statement assertions relative to investments.
Assertion Audit Objective
1. Existence
2. Completeness
3. Rights
4. Valuation/allocation
Presentation and Disclosure
Click here for the solution: For the year ended 2010, Jocelyn Morris, CPA, has been engaged to audit Rogers, Inc., which is a continuing client
Friday, July 31, 2015
Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2009
P 9.35 Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2009. Henderson Energy is regulated by the state utility commission and because it is a publicly traded company the audited financial statements must be filed with the Securities and Exchange Commission (SEC).
Henderson Energy is considerably more profitable than many of its competitiors, largely due to its extensive investment in information technologies used in its energy distribution and other key business processes. Recent growth into rural markets, however, has placed some strain on 2009 operations. Additionally, Henderson Energy expanded its investments into speculative markets and is also making greater use of derivative and hedging transactions to mitigate some of its investment risks, Because of the complexities of the underlying accounting associated with these activities, Henderson Energy added several highly experienced accountants within its financial reporting team. Internal audit, which has didrect reporting responsibility to the audit committee, is also actively involved in reviewing key accounting assumptions and estimates on a quarterly basis.
Whiteheads discussions with the predeccessor auditor revealed that the client has experienced some difficulty in correctly tracking existing property, plant, and equipment items. This largely involves equipment located at its multiple energy production facilities. During the recent year, Henderson acquired a regional electric company, which expanded the number of energy production facilities.
Whitehead plans to staff the audit engagement with several members of the firm who have experience in auditing energy and public companies. The extent of partner review of key accounts will be extensive.
Based the above information, identify factors that affect the risk of material misstatement in the December 31, 2009 financial statements of Henderson Energy. Indicate whether the factor increases or decreases the risk of material misstatement. Also, identify which audit risk model component is affected by the factor. Use the format below:
Factor-Effect on the Risk of Material Misstatement-Audit Risk ModelcComponent
Henderson is a new client - Increases - Inherent risk
Click here for the solution: Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2009
Henderson Energy is considerably more profitable than many of its competitiors, largely due to its extensive investment in information technologies used in its energy distribution and other key business processes. Recent growth into rural markets, however, has placed some strain on 2009 operations. Additionally, Henderson Energy expanded its investments into speculative markets and is also making greater use of derivative and hedging transactions to mitigate some of its investment risks, Because of the complexities of the underlying accounting associated with these activities, Henderson Energy added several highly experienced accountants within its financial reporting team. Internal audit, which has didrect reporting responsibility to the audit committee, is also actively involved in reviewing key accounting assumptions and estimates on a quarterly basis.
Whiteheads discussions with the predeccessor auditor revealed that the client has experienced some difficulty in correctly tracking existing property, plant, and equipment items. This largely involves equipment located at its multiple energy production facilities. During the recent year, Henderson acquired a regional electric company, which expanded the number of energy production facilities.
Whitehead plans to staff the audit engagement with several members of the firm who have experience in auditing energy and public companies. The extent of partner review of key accounts will be extensive.
Based the above information, identify factors that affect the risk of material misstatement in the December 31, 2009 financial statements of Henderson Energy. Indicate whether the factor increases or decreases the risk of material misstatement. Also, identify which audit risk model component is affected by the factor. Use the format below:
Factor-Effect on the Risk of Material Misstatement-Audit Risk ModelcComponent
Henderson is a new client - Increases - Inherent risk
Click here for the solution: Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2009
Subscribe to:
Posts (Atom)